Exact Sciences Corp

NASDAQ:EXAS

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon. My name is Jeffy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Exact Sciences Corp. Fourth Quarter 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

Megan Jones, Investor Relations, you may begin your conference.

[Megan Jones, Investor Relations]

Thank you, Jeffy, and thank all of you for joining us for Exact Sciences’ fourth quarter and full year 2018 Conference Call. On the call today are Kevin Conroy, the company’s Chairman and CEO; Jeff Elliott, our Chief Financial Officer; and Mark Stenhouse, President of Cologuard.

Exact Sciences issued a news release earlier this afternoon detailing our fourth quarter financial results. If you have not seen it, please go to our website at exactsciences.com. During today’s call, we will make forward-looking statements based on current expectations. Our actual results may differ materially from such statements. Descriptions of the risks and uncertainties associated with Exact Sciences are included in our SEC filings, which can be accessed through our website.

It is now my pleasure to introduce the company’s Chairman and CEO, Kevin Conroy.

[Kevin Conroy, Chairman and Chief Executive Officer]

Thank you for joining us this afternoon. 2018 was a landmark year for EXACT Sciences and we’re incredibly excited about the company’s long-term potential. The team delivered $454 million in revenue, helped to screen 934,000 people for colon cancer and launched a partnership with Pfizer to bring Cologuard to more patients. The momentum we built in 2018 gives us greater confidence, will grow from 4% market share today to 40%, which is our long-term goal for Cologuard and we’ll continue delivering life changing innovations in early cancer detection.

We fully intend to create a new standard of care and significantly impact the health prospects of millions of people. Today, we’ll start by reviewing our performance against our 2018 priorities. Then we’ll discuss our financial results and guidance and conclude with our 2019 priorities. The EXACT Sciences team set and then achieved each of our 2018 priorities. Our first priority for 2018 was to command the core Cologuard business. We expanded our sales force and made tremendous progress contracting with top payers helping address two key barriers to Cologuard adoption. The EXACT Sciences’ sales team focused its efforts on a targeted group of high potential primary care providers.

Our data show that higher frequency of sales calls on this core group will help to increase Cologuard adoption. We know estimate that 94% of people, who completed a Cologuard test, will have no out-of-pocket costs. Thanks to the efforts of our market access team. We have signed in-network agreements with most major insurers and added nearly 80 million total contracted lives in 2018. We expect the benefit of widespread coverage to increase over time as our sales and marketing teams deliver that message broadly to physicians and patients.

Our partnership with Pfizer is off to a strong start. We concentrated our efforts on two objectives during the first few months of the partnership. First launching Cologuard to Pfizer’s U.S. internal medicine team and second, developing and executing a detailed marketing plan. In 2019, our efforts will expand to increasing adoption within large health systems.

Moving to our second priority for 2018, preparing for future demand. We increased our annual Cologuard lab capacity from 1.5 million to 3 million tests while lowering costs of goods per test by more than 9% during 2018. We achieved this by expanding our current lab’s footprint and introducing automation throughout the lab. We’ve increased the size of the reagent labs that we manufacture, resulting in increased capacity and lower cost of goods. This ensures we can scale efficiently to meet growing Cologuard demand.

Moving to our third priority, advancing the pipeline, we made significant progress in 2018 on multiple pipeline opportunities representing billions of dollars in incremental U.S. market potential. Following the American Cancer Society’s colorectal cancer guideline update to include people ages 45 to 49; we initiated a prospective trial for Cologuard’s use in this population. We also published promising data on liver cancer biomarkers to support further development of a liver cancer test in high risk individuals.

We’re pleased with the enhanced results in one of our pipeline opportunities after incorporating DNA preservation technology from Biomatrica. Our development work showed that the LBgard to – provides the best overall sample stabilization approach. We expect this superior preservation technology will be a critical advantage as we develop additional liquid biopsy tests.

We’re proud of what the Exact Sciences team achieved in 2018. Our CFO, Jeff Elliott, will now review our fourth quarter and full year financial results and updated guidance.

[Jeff Elliott, Chief Financial Officer]

Thank you, Kevin. Good afternoon everyone. When discussing financial results, I’ll refer to changes compared to the fourth quarter of 2017 unless otherwise stated. Fourth quarter revenue increased 64% to $143 million and completed Cologuard test volume was 292,000 up 66%.

For the full-year revenue in completed test grew 71% and 64% respectively. Fourth quarter average Cologuard recognized revenue per test was $486 and better than expected on strong collections.

On a time lagged basis, our average recognized revenue per test was $476 at the end of the fourth quarter, an increase of $38. Fourth quarter Cologuard cost of sales improved by $5 to $129 per completed test, which was slightly better than expected due to scale efficiencies in our lab. We expect our first quarter cost per test to rise to the mid-$130 range, a temporary increase as we expand our total lab capacity to 7 million tests this year.

Fourth quarter gross margin was steady at 73%. For the full year, gross margin was 74% an increase of 380 basis points from the prior year. Fourth quarter operating expense of $154 million was slightly above our expectations due to the fees owed to Pfizer as a result of increasing Cologuard revenue.

Selling and marketing expense increased due to the full quarter impact of new sales hires during the third quarter and some additional advertising. G&A expense increased due to the hiring across the Company to support our growing business. R&D expense increased to support multiple pipeline initiatives including Cologuard 45, Cologuard 2.0 and our liver cancer tests.

At $496 million for the full year, operating expense increased 63%, which was eight points lower than revenue growth. Cologuards compliance rates at the end of the year was 64% as previewed. We expect the compliance rates to increase to 65% in the first quarter and 67% in the second quarter as we educate physicians and individuals of the broad insurance coverage for Cologuard.

Fourth quarter, cash used totaled $61 million including $18 million for the Biomatrica acquisition.

Most of our cash used in 2018 was on CapEx, as we worked to expand our lab capacity. Fourth quarter total CapEx was $52 million. As we complete our new lab site in 2019 we expect total CapEx of $175 million to $200 million. About $150 million of that relates to our capacity expansion projects and major IT upgrades. And the rest is associated with maintenance CapEx.

We expect most of our current expansion projects and related CapEx to phase out beginning in 2020. We have largely been financing the capacity expansion with capital we have on hand. Over time we intend to explore financing alternatives to help free-up capital that is currently tied up in our lab facilities.

We ended 2018 with cash and marketable securities of $1.1 billion. For the first quarter we expect operating expense of about $185 million. About half of that sequential step-up is from selling and marketing with the expected promotion fee payable to Pfizer our national sales meeting and the Cologuard Classic.

Looking at selling and marketing for the full year. We expect about two thirds of the growth above the fourth quarter run rate to be the fee paid to Pfizer and much of the remainder due to hiring of GI sales force.

For the first quarter. G&A is increasing due to the broader growth of the business initial staffing at our new lab and our IT initiatives. Throughout 2019, we will continue to grow our customer care team to maintain our high standards for customer service.

Our data show that our customer care efforts nearly doubled compliance rate for Cologuard and offer a very attractive return on investment. The investments we’re making in IT over the course of the year, including Epic will allow us to scale the business more efficiently starting in 2020.

For the first quarter, R&D is increasing primarily to support Cologuard enhancements and our pipeline development efforts. During 2018, we’ll continue to invest in our medical affairs team and generate additional evidence to support Cologuard growth. For the full year, we expect about 25% of our R&D to be Cologuard-related. The remaining 75% will be major pipeline initiatives including Cologuard 45, Cologuard 2.0 and our liver cancer test. We see our pipeline investments as a highly efficient use of capital. For example, the potential Cologuard label expansion to age 45 would increase the total adjustable market for Cologuard by nearly $4 billion. We believe our investments in Cologuard 2.0 could increase us revenue by at least 5% to 10% and reduced costs of goods.

The total addressable market for a planned liver cancer test is estimated and more than three million people in the U.S. alone. Further, many of the investments we’ve made for Cologuard such as FIT and our commercial infrastructure can be leveraged for our liquid biopsy programs. Over the past three years, we’ve made great progress growing Cologuard efficiently.

Revenue and gross profit growth rates have significantly outpaced the operating expense growth rate. We’re making investments now to reach our long-term goal of at least 40% market share and nearly $6 billion of Cologuard revenue. At $6 billion in revenue we see a path for Cologuard to at least 80% gross margin and at least 40% operating margin.

Turning to our guidance, for the full year, we expect revenue of $710 million to $730 million in Cologuard volume of 1.49 to 1.51 million completed tests. For the first quarter, we expect 310,000 to 320,000 completed tests. Historically sequential growth is slowest from the fourth quarter to the first quarter due to the impact of holidays and regular seasonality on our Cologuard business. Our internal goals are focused on revenue. And we run the business based on our expectations for revenue growth, because of this, and due to the tremendous progress we’ve made securing reimbursement for Cologuard and it’s more stable revenue per test, we don’t plan on disclosing and Cologuard volumes starting in 2020.

And I’ll now turn the call back to Kevin.

[Kevin Conroy, Chairman and Chief Executive Officer]

Thanks Jeff. As we look to 2019 the Exact Sciences team is focused on three priorities: one power, our partnership with Pfizer; two, enhance Cologuard; and three, advance our pipeline of liquid biopsy tests. Working with Pfizer we’re aggressively seeking greater adoption from this important customer segment in the coming years, more than half of primary care providers in the U.S. are employed by or affiliated with a large health system. Today, Cologuard has broad coverage and is included in all major guidelines and quality measures, allowing us to increase adoption in this under penetrated market. We’ll take time to generate significant uptake within health systems due to their size, complexity, and therefore longer sales cycles.

Cologuard complements Pfizer’s existing women’s health products, and this area represents another opportunity for growth. Last month, Pfizer launched Cologuard to its women’s health team. We haven’t historically called an OB/Gyns. There are more than 30,000 in the U.S. and to date only 4,000 OB/Gyns have ordered Cologuard. Approximately 25% of OB/Gyn patients are 50 years and older. And cancer screening is often discussed in this setting, making it an ideal area to grow Cologuard’s use.

To educate gastroenterologists about Cologuard, we plan to build a specialty sales team through internal promotions and some external hires. There are approximately 14,000 GIs in the U.S. and about 8,000 hip ordered without frequent contact from our salesforce. GIs are important influencers in colorectal cancer screening, so we’re optimistic about the potential within this physician group. As we work to grow Cologuard in multiple channels, we’re laying a strong foundation for expansion. We expect to open our second lab later this year with an initial annual capacity of four million Cologuard tests.

We are also laying the groundwork to install Epic’s electronic health record system as the core of our IT infrastructure. This world-class EHR system will allow us to scale efficiently and enable greater connectivity with our patients and physicians.

Moving to our second priority, enhancing Cologuard, there are 19 million average risk Americans between the ages of 45 and 49 who should be screened for colon cancer according to the American Cancer Society’s guidelines. That represents an additional $4 billion in total market potential for Cologuard. According to the modeling work performed by the American Cancer Society, there’s greater benefit to screening people ages 45 to 49 than people over the age of 70.

We want to make Cologuard available to younger Americans who are at an increasing risk for colorectal cancer. We met with the FDA in January to discuss the path forward for a Cologuard label expansion to age 45. We expect to submit our application in the first half of this year and hope to have a label expansion in the first half of 2020.

Working with Mayo Clinic, we discovered promising biomarkers for Cologuard 2.0 and are excited about the potential to make Cologuard an even better test. The goal of this program is to increase Cologuard performance, especially specificity. This would further improve the overall health economic case for Cologuard, which is already strong.

Cologuard 2.0 could also increase throughput at our lab, and therefore, reduce cost of goods, making the return on investment very attractive. We will provide additional updates as we work to further validate these markers.

Moving to our third priority, advancing our liquid biopsy programs. Through our 10-year collaboration with Mayo Clinic, our pipeline is focused on developing test for the early detection, accurate diagnosis and recurrence of the top 15 cancers. The Mayo Clinic team has 50 experts working on nearly 70 protocols, helping form the foundation of our pipeline.

With Mayo Clinic contributing to early research and discovery, we have identified biomarkers for 13 of the top 15 cancers. Our teams then perform multiple studies to validate these markers using our highly sensitive and specific technology platform. Building off our success bringing Cologuard to patients, we believe this collaboration will be productive over the next decade.

We are developing and plan to launch multiple tests that meet significant clinical needs. The current standard of care for liver cancer testing is inconvenient and not accurate enough, and more than two-thirds of high-risk patients avoid recommended testing.

Our goal is to provide a more accurate test than the current standard of care, which is ultrasound, with or without alpha-fetoprotein. Early stage sensitivity for ultrasound alone is 45% with a high false-positive rate, combined with AFP that sensitivity increases to 63%. We have published data that show improvement from these levels for a panel of markers, and we continue to enroll patients to finalize development of the test.

We plan to begin enrollment in a prospective head-to-head study in the coming months to strengthen the evidence supporting our liver cancer tests. We’ve demonstrated the power of this platform with Cologuard. We have the experienced team, resources, technology, regulatory expertise and commercial scale to be the leader in cancer diagnostics and we’re confident we’ll get there.

Now we’re happy to answer your questions.

[Operator]

[Operator Instructions] Your first question comes from Brandon Couillard with Jefferies. Your line is open.

[Brandon Couillard, Jefferies]

Hey, thanks. Good afternoon. Jeff, in terms of the 2019 guide, I mean, you beat fourth quarter revenues by about $20 million. You had talked about an outlook for 2019 of about $700 million. That’s about where the midpoint is today. Even though – it suggest that your assumptions relative to where you were thinking four, five months ago, hasn’t really changed at all. Is that the case in – kind of talk to us about the factors that sort of formed your view, initial view for the year?

[Jeff Elliott, Chief Financial Officer]

Sure. So the midpoint today is about $720 million, so let’s keep in mind that today it’s February, it’s still very early in the year. There’s a lot of unknowns out there in terms of the initiatives that we’re putting in place and the productivity of our sales team and the Pfizer team. So early in the year, we think that $710 million to $730 million for the range is the right place to be. As far as what has changed in the last few months, we’ve seen very good progress both with our internal teams, the sales teams are doing a very nice job, the Pfizer partnership is off to a great start. And we’ve brought the mid-point out to $720 million versus the prior preliminary guidance we had issued was around $700 million. So things are a little bit better than we had issued back when we first announced the Pfizer partnership.

[Brandon Couillard, Jefferies]

And then, Jeff or Kevin, you sort of spoke to expectations for the compliance rate ticking up over the next several quarters. That seemed to be a program that was more doc facing, whereas come to sort of think about the compliance engine is more patient facing. What are you doing differently in terms of programs to lift that compliance rate and then how should we think about that opportunity kind of beyond the first half of 2019?

[Jeff Elliott, Chief Financial Officer]

Sure. So keep in mind how we report the compliance rate. We look back 12 to 18 months and we measure what percent of the kits we ship out come back. So at the end of 2018 that was looking back in the second half of 2017. During that period was when we had that 649 message in place. We talked about that last year. We sent to remove that message and that message now is, is that today about 94% of our patients who get Cologuard, have no out-of-pocket. So that change in message has been a nice lift in the compliance rate.

On top of that, Kevin talked in his remarks about signing about 80 million incremental contracted lives last year. Getting the incremental coverage is significantly important to driving compliance rate. What we’ve actually seen on the commercial side of our business, we used to talk about compliance rate in the high 50% range. Today we’re seeing that trend towards the low to mid 60% on the commercial side. And we’ve seen that the Medicare compliance rate hover in the low 70%s. So by and large, the compliance rates are trending in the right direction now.

Maybe Mark could talk more about some of the other compliance initiatives we have in place.

[Mark Stenhouse, President of Cologuard]

I think the thing that I would add to compliment your message is that the focus of our selling organization is not only getting physicians to write more Cologuard, but also educating their back office. We know that those offices that use our provider portal and order electronically, order more Cologuard. So the really press from our selling organization is to holistically sell Cologuard and drive electronic ordering.

[Brandon Couillard, Jefferies]

Very good. Thank you.

[Operator]

Your next question comes from Brian Weinstein with William Blair. Your line is open.

[Brian Weinstein, William Blair]

Hey, guys, thanks for taking the question. I appreciate it. So we can just talk about, first, the sustainability of the doc adds that you guys saw in the quarter. Obviously, it was above the recent trend line, the 15,000. Can you just talk about what you attribute that jump to? And if you think that that type of a level is sustainable or do you anticipate kind of going back more towards the trend line, what’s baked into your guidance there? Thanks.

[Kevin Conroy, Chairman and Chief Executive Officer]

Sure. So fourth quarter was a really strong quarter. We jumped out from like 10,000, which had been the run rates since about the second quarter of 2016 up to 15,000 in the quarter. As far as what drove that, I think there’s several different factors. One, the significant gains in insurance coverage I think has been very helpful getting covered with all the major payers. And today 94% of patients having no out-of-pocket, that’s a strong message that resonates well with physicians.

On top of that, we added to our sales force, we added, we talked to 100 additional field reps in middle of last year. And then Pfizer joins the Cologuard promotional efforts in early October. Those efforts have all helped. In the fourth quarter, we also went out to network TV nationally for the first time and we contributed well together with Pfizer, a little bit more on TV spending. So I think those factors probably led to the increase.

As far as sustainability, I think our goal is to drive as many physicians as possible to Cologuard. Today only about 37% of all these relevant providers have ordered Cologuard. So there’s a long ways for us to go. At 15,000 though, that’s a really strong number, I would think of a range ideally above the 10,000 run rate we have been at, but likely somewhere below the 15,000 number as a more sustainable pace.

[Brian Weinstein, William Blair]

Got it. And then a question for Mark, on the performance response curves that you guys are typically talk about what those hoping of the same rate before. And if so, given that I think last year at this point you guys had a couple of hundred people that were calling on docs and now with Pfizer, this would be my estimate, of course, not yours. You’re going to be combined well over a thousand by my math. It would seem that there would be some pretty good opportunity therefore, utilization increases. So can you just talk to the performance response curves and if I’m thinking about that right. Thanks.

[Jeff Elliott, Chief Financial Officer]

Thanks, Brian. I think it is clear that reorder rate is the key to driving overall Cologuard share and we’re trying to move it of course from a 4% to 40% share. And that’s the ambition to do that is driving reorder. We definitely look at responsiveness in the data that you’re speaking about in terms of the response curves are similar today as they were in previous quarters. We watch very closely the reorder rate by distinctive rep in physician cohorts.

So where we have overlapping doctor relationships between Pfizer and Exact and where we have individual relationships between Exact reps and doctors and Pfizer reps and doctors. We’re modeling that as a go forward basis, which tells us a lot about message and frequency of message in each of those distinctive cohorts.

[Brian Weinstein, William Blair]

Thank you, okay.

[Operator]

Your next question comes from Derik De Bruin with Bank of America. Your line is open.

[Derik De Bruin, Bank of America]

Hi, good afternoon.

[Jeff Elliott, Chief Financial Officer]

Hi, Derik.

[Derik De Bruin, Bank of America]

Hey, so a couple of questions I guess. Can you talk a little bit more about the plan for the health system and sort of like how should we think about the barriers there and what that opportunity to have been, I mean obviously that’s a huge opportunity for you just once more when you’re going to have a little bit more visibility into winning some contracts there.

[Jeff Elliott, Chief Financial Officer]

Hey Derik, I think is a great question. So first thing to think about is it 50% of our U.S. healthcare practitioners are affiliated to health system. So obviously it’s a very important driver of value for us. You’re also seeing health system progress embedded in our revenue numbers, but you’re already seeing health systems that have active cohort cancer screening programs, many of which include Cologuard that are driving value in the neighborhoods around that health system by the doctors that are affected by a positive health system decision.

The sales cycle is extended typically a year why, because you have to influence the medical officer or the quality officer, get in the electronic ordering system and then motivate the underlying physician population right the product. The really good news here is that Pfizer brings significant expertise as does the Exact team. And we’re working on the right selling message contained to the most important health systems. But I really think you’re going to see this pickup over time, but I think the key messages, we have a lot of physicians, 50% that are affiliated to these systems already. And you’re already seeing in advancement and the productivity of health systems investment of revenue number today and it will only get better over time.

[Derik De Bruin, Bank of America]

Great. And just one on the Biomatrica acquisition. Is there any revenue embedded in the guidance for this year. Can you talk a little bit about the metrics on that one?

[Jeff Elliott, Chief Financial Officer]

Sure. There is some revenue it is immaterial though, largely what you’re seeing is Cologuard.

[Derik De Bruin, Bank of America]

Great, thank you.

[Operator]

Your next question comes from Doug Schenkel with Cowen. Your line is open.

[Adam Wieschhaus, Cowen]

Hi there, this is Adam Wieschhaus on for Doug. Thanks for taking my questions. Jeff, I appreciate the detail you provide on how to think about the number of new provider additions this year versus Q4 levels. Can you provide any detail on what your 2019 guidance assumes in terms of how complete or as per practice and ASPs with compared to Q4 levels?

[Jeff Elliott, Chief Financial Officer]

Sure. In terms of revenue per test with big data is something in the range of right around 480, I think the range is for 477 to 483, as far as tests per provider we expect that to trend up over time. And keep in mind here that today with 4% market share and long-term or go off get into 40% there’s a long ways to go. If you look at the average physician today does orbiting Cologuard, our penetration rate is in the 5% to 10% range. So we expect to make continued progress on that metric over time.

[Adam Wieschhaus, Cowen]

Thank you. I believe you indicated you plan to submit your FDA application for Cologuard 45 in the first half of this year. Does that mean the FDA does not require result from your ongoing prospective trial? And would you be considered in the next USPSTF decision cycle?

[Kevin Conroy, Chairman and Chief Executive Officer]

We don’t have a final agreement with the FDA on the plan forward. However, there is an indication that prospective data will not be needed to support the submission. We are committed to that study nevertheless we will be laying out of what evidence we will submit to the FDA once we have a final understanding what the FDA of exactly what is required. We are very pleased with the outcome of the meeting and one thing to note is we’re particularly appreciated that the agency team came in and met with us during the government shutdown.

[Adam Wieschhaus, Cowen]

Great. Thanks, Kevin.

[Kevin Conroy, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Your next question comes from Catherine Schulte with Baird. Your line is open.

[Catherine Schulte, Baird]

Hi, thanks for the question. For the Pfizer rep, is there upper cap to their Cologuard, the weighted bonus or is the upside really unlimited based on their performance? And then related, how frequently is that quotas that is it annually, quarterly, monthly.

[Kevin Conroy, Chairman and Chief Executive Officer]

The Pfizer reps are comped with a – and I’m speaking in very general terms, that both the base salary and a target bonus. A portion of that bonus is driven off of Cologuard utilization within their territories. So that is – as we laid out when we announced this agreement, there is a – depending on where Cologuard is positioned in the rep’s bag, whether it’s P2 or P3, that fraction of their overall bonus increases as it goes from P3 to P2.

So I wouldn’t – we don’t have the information in terms of whether their bonuses are capped or uncapped and that’s not our purview. What we have in the agreement with Pfizer is at least a minimum fraction of the reps incentive comp focused and driven off of Cologuard.

[Jeff Elliott, Chief Financial Officer]

I think the thing I would add to this is, I think underpinning your question is what’s the enthusiasm of the Pfizer representative for Cologuard. And I would tell you the qualitative feedback I’ve shared before is extraordinarily strong, whether you’re looking at the field reps, the health systems, the marketing team as evidenced by the addition of the OBGYN Women’s health team, Pfizer is really committed to Cologuard from the top of their management structure all the way down to the reprehensive deal.

[Catherine Schulte, Baird]

Very helpful. And then Jeff, just going back to ASPs. Can you just walk us through those dynamics a bit more? $480 would be slightly down versus what you saw in 2018. So just want to understand the puts and takes there.

[Jeff Elliott, Chief Financial Officer]

The biggest thing to keep in mind is the mix shift that is underway. If you look at our Medicare mix that went from – in fourth quarter of 2017 at 60% of volumes to 52% in the fourth quarter of 2018. And we’ve continued to see that mix shift happened so far in 2019. So that mix temporarily put some downward pressure on the overall revenue per test. We expect revenue stability on the Medicare side of the business. And as we’ve talked about here today, we expect to continue to make improvements on the commercial side of our businesses as we sign more and more contracts. So it’s really a mix shift factors here that provides a temporary drag on the overall blend of our ASP. And it’s really, it’s because still to date, not all commercial insurers are in network. There’s still a small percent that are still out of network.

[Catherine Schulte, Baird]

Okay. Thank you.

[Operator]

Your next question comes from Daniel Brennan with UBS. Your line is open.

[Daniel Brennan, UBS]

Great. Thank you. Thanks for taking the questions. I guess I wanted to ask on first the retest opportunity and what’s possibly, Jeff, what’s kind of baked in for 2019 guidance, I guess you almost have 250,000 patients that are eligible, I know there’s a waterfall of which of those actually could be eligible. Can you just walk us through what you’ve assumed for the retest opportunity?

[Jeff Elliott, Chief Financial Officer]

Sure. As you’ve heard us talk before, we’ve made some progress on the rescreen opportunity, but we’re not quite to where we want to be yet. So the long-term, there’s a huge opportunity. If you look back at the volume that we tested last year and you look ahead three years, that’s about a $250 million revenue opportunity. So this is a huge opportunity. We continue to make progress on it. It’s not where we need to be. What we’ve baked in the guidance is continual gradual progress on it. But keep in mind when you look back three years ago from today, it’s still relatively small opportunity compared to the broader onscreen population that’s out there.

[Daniel Brennan, UBS]

Okay, great. And then maybe as a follow-up, just back on the utilization question, I guess. Our presumption was that with Pfizer, given the frequency of visits at the Pfizer salesperson likely has and the familiarity with the docs that you would probably see a faster ramp and kind of doc usage as Pfizer came on board. So maybe Mark, I don’t know if you can comment on that and kind of what you’re seeing in practice right now. I know it’s early, but you’ve got call it kind of four month under the belt or almost five months under the belt. And is it possible that utilization increase you saw sequentially in Q4 from Q3 could continue. Thank you.

[Mark Stenhouse, President of Cologuard]

Yes. Couple of points to make here. One is, the Exact Sciences rep, because of their experience level with Cologuard and the fact that it is a single product promotion has the most productivity relative to Pfizer. They sell more per visit than the Pfizer rep. That is in part because the Pfizer is a portfolio representative that has multiple products and Cologuard’s in the second or third position. So I think you have to judge the value of Pfizer’s contribution in that way.

That being said, where Pfizer and Exact Sciences overlap promotion on the single doctor, you do see incremental value creation. So we’re spending a lot of time understanding the right target – physician target selection because again, a vast number that Pfizer targets were specific to their sales force, meaning that they’re calling on them alone, not with Exact. And that’s a majority of their targets. So they have low historical use of Cologuard’s. So they’re starting from a low position of experience. So that’s influencing the uptake curves within Pfizer alone relative to the contribution of Exact and the shared focus between the two companies.

[Daniel Brennan, UBS]

Great. Thank you.

[Operator]

Your next question comes from Patrick Donnelly with Goldman Sachs. Your line is open.

[Patrick Donnelly, Goldman Sachs]

Great. Thanks for taking the questions guys. Maybe Kevin, just that high level, can you talk through the strength in the quarter of kind of leading to the guidance raise, parsing out how much was driven by the increased advertising, the sales force additions, you guys did 100 reps last summer and then the Pfizer impact? I know, you can’t sometimes do that much granularity, but just that high level of trying to get a feel for how much was underlying momentum compared to Pfizer being layered on during the quarter?

[Kevin Conroy, Chairman and Chief Executive Officer]

Well. First of all, Jeff wouldn’t be very happy with me, if I provided much granularity here. It’s really a mix of those things and it’s early in the year. We have significant aspirations to execute. It’s complicated. There are a lot of Pfizer reps and there are a lot of Exact Sciences’ reps. We are about four months into launch and we need to continue to drive a common clear theme and repeat messaging to the physicians who are very receptive to changing their colon cancer screening behaviors when reached. So as the long way of saying, I don’t want to break that out. Jeff, you may want to, so I’ll pass it over to you.

[Jeff Elliott, Chief Financial Officer]

So Patrick, we track each of those things very closely and we’re very pleased with the progress that all have made. We’re not going to break it out here. I think it’s more important to say, this is a broad quarter. We had strengthened from our reps, strengthened the Pfizer reps, the TV ads are working wonderfully. We also had the market access when that we talked to about. So this is a very broad based quarter. We’re not going to break out each one specifically though.

[Patrick Donnelly, Goldman Sachs]

Okay. I don’t thank you, but that’s helpful. And then just on Cologuard 2.0 getting to the market early in 2020, can you talk through the process to get there the biggest variables at that timeline, just trying to get a sense of the confidence level in the timeline, what steps you have control over versus things that are out of your hands over the next year or so?

[Kevin Conroy, Chairman and Chief Executive Officer]

Yes. So I assume, you’re asking about a Cologuard for 45 to 49, we haven’t given guidance on Cologuard 2.0. Yes. So Cologuard 45, in terms of that time, in the first half of next year, we have – we’re reasonably confident. Anything can happen based upon data submitting, real data to the FDA. And this will be a thorough review by the agency. We are reasonably confident that we will meet that our timeline. And the real challenge and opportunity here will be that there is a large number of people to address. And the age 50 has been an embedded, understanding for a couple of decades, more than a couple of decades now. And so changing the understanding of physicians and consumers and also payers will take some time. We’re really committed to this age group.

And then if you go back and take a look at the materials that the American Cancer Society put out – they put out a great PowerPoint presentation, when they made this change and you can see the impact on each cohort. And not only is there a greater life years gained for the age 45 to 49 year cohort than the age take it 70 to 74. You’re having an impact on people who are in the kind of middle of their life that with kids and jobs and economic activity and big circles of people who depend upon them. And so that’s why as a company, we’re really passionate about making sure we get this right.

[Patrick Donnelly, Goldman Sachs]

Great. Thank you.

[Operator]

Your next question comes from Puneet Souda with SVB Leerink. Your line is open.

[Puneet Souda, SVB Leerink]

Yes. Hi, thanks. Thanks for taking my question. So Kevin, I was trying to understand in terms of if you could elaborate a bit on the controls and measures that you have in place in the early read on metrics. I’m asking just because you are able to track orders with the excellent precision. You were upgrading the software, you were upgrading the number of capabilities here, you are driving a lot of performance. So I’m just trying to understand, last year and 2017 September, I think, we had the pricing transparency for patients that was implemented, but that wasn’t visible sort of two quarters and two quarters after.

So just wanted to get a sense of the controls and measures that you have in place now and how quickly you will be able to see things in the sales channel if marketing is having an impact or fluids having an impact or any of those things that usually impact the sales channel because you have a much larger sales force of two great organizations? So just wanted to get your view on that?

[Kevin Conroy, Chairman and Chief Executive Officer]

Well, first of all, I’d say that, we just took guidance up – to the mid point $20 million into the high end $30 million. So we have visibility into what we expect will be a really solid year for growth. And that’s obviously significant growth over last year. In terms of our infrastructure and ability to see trends, we have deep data capabilities embedded within our IT infrastructure and we look at that on a daily or multiple times a day basis and are able to do extensive analysis. That gives us the comfort, as Mark mentioned, as we can see performance differences between the groups that have positions that are reps call on, that alone that Pfizer reps call on alone and then physician that both reps, teams of reps call on. And so that data gives us great confidence in our ability to kind of predict what is going on. It’s just really early in the year. And so, any line that we draw depends upon execution. Mark?

[Mark Stenhouse, President of Cologuard]

The only thing I would add Kevin and to answer the question is we ran, you’ll recall a TV pilot tests in the third quarter we incrementally spend in five distinct markets with match controls and that pilot was successful and then informed our media strategy in the fourth quarter and into 2019. And that afforded us the opportunity to both go into syndicated cable where we have been historically and then to go into network TV. It also is helping us think about in our media strategy, the mix of 32nd spots versus 60. And how we kind of manage the overall media strategy, TV relative to digital relative to social, all of which we’ve learned a lot in the last six months. And we can test responsiveness very quickly and reallocate our spend in a way that operationalize and makes our spend more efficient. So I think it’s a very learned organization that’s using the learnings to inform strategy in real time.

[Puneet Souda, SVB Leerink]

Okay. That’s very helpful. Thanks for the details. And then my second question is on Cologuard blood and the liquid biopsy opportunities that you’re looking at. So we noticed that there are number of trials as these are sub trials of the 40, 45-year-old or nine-year-old, 45 to 49-year-old populations that are also collecting blood and then it seems to be part of your liquid biopsy approach. So just wanted to understand when you go and submit the data to FDA, as any of the blood data set going to be a part of it, or is it just this is largely being collected for R&D studies friendly and longer-term potentially looking at future liquid biopsy, potential for Cologuard CRC screening tests down the road.

[Kevin Conroy, Chairman and Chief Executive Officer]

Thanks, Puneet. These are two separate programs; Cologuard 45 is our current Cologuard test. And then Cologuard blood is research work that we’re doing with Mayo Clinic and other institutions in the U.S. and around the world to collect samples, so that internally, we can continue to test different markers and different technologies to see if we can achieve the level of sensitivity and specificity that we feel is needed to bring a blood based colon cancer screening test to mark the two different programs, so know the – any blood data will not be submitted as part of a Cologuard 45 submission.

[Puneet Souda, SVB Leerink]

Okay. That’s very helpful. Thank you.

[Operator]

Your next question comes from Per Ostlund with Craig-Hallum Capital. Your line is open.

[Per Ostlund, Craig-Hallum Capital]

Thanks. Good afternoon everybody. Two questions from me. Kevin, first on Cologuard 2.0, I think you said before that you hadn’t articulated any timelines on that, but wanted to give you a chance to do it now, if there’s – if there’s anything that you can speak to even very, very broadly, and I guess going back to the prepared remarks, the comment was made if I heard it correctly, that, that it could drive the U.S. revenue growth up 5% to 10% on that next generation test. When you look at that, is that – is that an assumption that there’s going to be a higher ASP attached to that? Is that an expectation maybe of greater adoption given the superior test? What might we be thinking about there?

[Kevin Conroy, Chairman and Chief Executive Officer]

We are providing a timeline around Cologuard 2.0 other than we’ve said this would be measured in years, not quarters. I think that it does at least a three-year program to bring a new task through yet another likely potentially 10,000 patient clinical trial while we’re doing product development. We’ve identified markers that we’re testing today and the purpose is to improve the sensitivity and specificity of Cologuard, number one, is to improve the fifth test that has embedded within Cologuard, so that the stability of that sample extends beyond three days, which brings the cost of goods down and drives up total compliance, because there is less wastage when you lose a sample, because it came back four or five days later, that’s a lost opportunity to screen a patient. Also, presently with a three-day return, there are added costs of overnight shipping with UPS and we also limit the days on which patients return their test, because – so there are a number of different benefits both in the overall compliance. You’re losing fewer patients unnecessarily to colonoscopy if you have improved specificity. And the fit test benefit is real, Jeff, I don’t know, if you want to try to quantify any of those?

[Jeff Elliott, Chief Financial Officer]

Those factors that Kevin just ran through are how you can easily get to the 5% to 10% rate. When you add up, we’ll say you improve the fast positive rate by three points, you get rid of a low single-digit percent of spoilage due to the fit test stability, and then you increase the compliance rate that’s worth at least 5% to 10% of incremental revenue. And then on top of that you have the reduction in cost of goods. So when you do that math, the net present value of this program is easily over $1 billion. So, we think it’s a highly efficient use of capital to invest in Cologuard 2.0.

[Per Ostlund, Craig-Hallum Capital]

Fantastic. That’s a lot of color. Thank you for that. And then quickly just turning to the – to your plans for GI market. Have you quantified what you’re thinking about in terms of hiring, the number of staffs there? And I guess I’m curious, you talked about the 14,000 practitioners within that discipline and 8,000 kind of already ordering, more or less unprompted. You’ve talked about OB/GYN being almost a de facto primary care market in women. Is there anything that you have to do differently with the GI market in terms of messaging in order to get over any sort of hurdle that Cologuard is somehow competitive with colonoscopy or something that that practitioner already does?

[Mark Stenhouse, President of Cologuard]

Yes. It’s a great question. So yes, we have calculated the number of reps we need to call on a prescriber population in GI, those we think that are most receptive to the message. It’s in the neighborhood of 50 to 64 reps. We’re still kind of finalizing the number, but it’s – that gives us adequate coverage into the population. We know that we need to call on GIs to support their use, because as you pointed out 8,000 had written. So, we know that they’re supportive of the product likely in a limited capacity. But you don’t build a relationship with a customer segment if you’re not actively calling on them.

So, our strategy is to call them, because we know that we can unlock kind of a relationship – build a relationship that – and that affects not only their prescribing, but their referral network of Internal Medicine physicians. clearly, we’ll need a different message. I do think you’re right there and we’re working on that message with our partner to figure out the exact strategy from a messaging that will influence GI. But ultimately, we know that GIs and Exact Sciences have the same ambition, which is to get more people screened and we think they’re going to be receptive that message. And we know that people need choice and then when they’re offered choice, their compliance with testing goes up. So that’s the fundamental message that we’re going to be carrying forward.

[Per Ostlund, Craig-Hallum Capital]

Very good. Thank you, mark.

[Mark Stenhouse, President of Cologuard]

Yes.

[Operator]

[Operator Instructions] Your next question comes from Mark Massaro with Canaccord Genuity. Your line is open.

[Mark Massaro, Canaccord Genuity]

Thanks guys. Can you speak to how the Exact reps are working with the Pfizer reps, just the collaboration that might be going on there? Can you also speak to any early progress with large health systems as it relates to the Pfizer’s impact? And can you share any surprises or lessons you’ve learned in the first four months?

[Kevin Conroy, Chairman and Chief Executive Officer]

Yes. It’s a great question. So, the first is how do the reps work together. It can be as tactical as physician by physician strategy, where we share physician overlap targets, the receptivity of that doctor to a message and how we sequence messages to influence the doctors comfort with our products. it could be how do we handle objections that a physician may have and how do we share training experiences is the experiences in general to improve our efficiency as a selling organization. So that’s kind of in the weeds, but it’s certainly one way those reps work together.

in terms of health systems, as mentioned Pfizer brings significant expertise here. The sales cycle is long. The first thing we’re doing is we’re coordinating efforts, because our team also has spent a fair number of quarters, years focused on these systems, what we know about them as a sales cycle is long, but we also know there’s embedded revenue already happening, because we’ve seen growth, we’ve seen cure pathways in systems, where Cologuard is part of that cure pathway and we’re seeing utilization influenced by that cure pathway.

So, what Pfizer brings to the table is an understanding and relationships and we’re leveraging them to advance our business. In terms of surprises and lessons, I think frankly, what is most encouraging? Is it the mission of both companies? Pfizer and Exact are very similar in terms of our core values, which then lends a effective partnership and there’s not kind of one organization shouting over another about what we need to do, there is a common voice and that’s to get more people screened and to grow our share from the 4% we have today to 40%.

[Mark Massaro, Canaccord Genuity]

Great. And then maybe another question for Jeff. Jeff, you talked about one-fourth of the R&D will go to Cologuard and the balance will go on new products, to me that would suggest that a lot of that spent is going to be ongoing throughout the year. So over the last couple of years you had the OpEx scale higher after Q1. So I’m just curious if we should think of the $185 million of operating expenses sort of as a baseline consistent with the last couple of years.

[Jeff Elliott, Chief Financial Officer]

The comment on OpEx or R&D specifically was 25% on Cologuard, let’s call that Cologuard 1.0, 75% will be on the other programs like Cologuard 2.0, liver, Cologuard 45. So the vast majority is done with the new products, which we think carry very attractive ROI, which is why we’re making those investments. As far as the step up in OpEx more broadly, Q1 we believe will be in the biggest step up of the year for OpEx. So we’ve talked about some of the investments there in terms of the fee paid to Pfizer, which in the first quarter is a significant portion of that total uptake.

We also have our sales meeting. We have the Cologuard classic events and some additional hiring we’re doing. So those are the main factors, but we think Q1 will be by far the biggest step up of the year.

[Mark Massaro, Canaccord Genuity]

That’s helpful. Thanks guys.

[Operator]

There are no further questions at this time. I turn the call back to the presenters for any closing remarks.

[Kevin Conroy, Chairman and Chief Executive Officer]

Thank you for joining us today to review our performance during a landmark year and preview of our 2019 priorities. Exact Sciences is positioned to become the leader in early cancer detection. We’re getting the life changing capabilities of Cologuard in front of more healthcare providers and people than ever before and advancing our liquid biopsy capabilities to help detect other cancers earlier.

A special thanks to the entire team at Exact Sciences for an outstanding 2018 and for the energy and focus they’re bringing to achieve our goals in 2019. Thank you.

[Operator]

This concludes today’s conference call. You may now disconnect.